Value Navin Fluorine at 22x with a TP of Rs 890

NFIL has a strong balance sheet with a likely improvement in return ratios (ROE/RoCE to go up from 13.5%/11.4% in FY16 to 18.3%/17.4% in FY20E respectively).

The stock price has seen a significant run-up (5x in 3 years) with limited scope for further re-rating in valuations.

Navin Fluorine International’s (NFIL IN) four decade long experience in handling niche Fluorine chemistry, strategic tie ups with significant entities (viz Honeywell PLC and Piramal Enterprises), prudent allocation of carbon emission reduction credits (earned Rs 400 crore from FY11-FY13 to invest in Specialty Chemicals and CRAMS) and faster than expected growth in CRAMS business (expected to grow at a CAGR of 65.8% from FY15-20E) are a testament to NFIL’s journey of being the strongest player in Fluorine chemistry. NFIL has a strong balance sheet with a likely improvement in return ratios (ROE/RoCE to go up from 13.5%/11.4% in FY16 to 18.3%/17.4% in FY20E respectively).

The capex of Rs 115 crore announced in Decemebr 2017 for the CRAMS business unit is expected to come on-stream by the end of 1QFY19 and will likely add Rs 230 crore (2x asset turns) to its topline by FY23E.We believe the CRAMS BU is expected to grow at a faster pace due to strong enquires from innovator pharma companies. While CRAMS business unit is expected to contribute 35% of NFIL’s topline by FY20E (from 6% in FY14), growth from the Refrigerants, Specialty Chemicals and Bulk Fluorides business is expected to be rather modest.

NFIL’s astute management is expected to catapult the much nascent CRAMS BU on the back of kilo to tonne level manufacturing facilities, synergies flowing in from Manchester Organics (MOL) acquisition & probable opportunities from postcommercialization stages. We have presented a comprehensive case study of a Chinese company (Yongtai Tech) to explore the likely opportunities in CRAMS.

The stock price has seen a significant run-up (5x in 3 years) with limited scope for further re-rating in valuations, we expect the stock performance to mimic earnings growth (17.2% earnings CAGR from FY17-20E). We are valuing NFIL at 22x FY20E EPS of Rs 40.4 and resume coverage with a TP of Rs 890. As the CRAMS BU of NFIL is opaque in terms of product profile, order book, nature of the intermediate (n-1 to n-10) and phase of the drug.